The Police Pension Fund of Peoria, Ill., filed a federal lawsuit Friday in Minneapolis alleging that Capella has defrauded it and other stockholders by failing to disclose allegedly "abusive and fraudulent recruiting and financial aid lending practices," which led to higher student enrollments and revenue and inflated stock prices.

Capella had this to say about the lawsuit: "We have received the complaint. We believe it has no merit and we are going to fight it vigorously."

Capella, founded in 1991, and its wholly owned subsidiary, Capella University, are based in Minneapolis. They employ more than 1,500 staff and 1,100 faculty members. Capella offers a number of postsecondary degree programs and serves about 38,000 students worldwide through its campuses and online courses.

The lawsuit notes that Capella's stock value was increasing this year until August. But a series of news reports indicated concerns about federal spending at for-profit colleges and universities, culminating in an Aug. 13 Department of Education report showing that student-loan repayment rates at for-profit schools significantly lagged repayment rates at public and private nonprofit institutions.

Capella's repayment rate was 40 percent, just above its peer group's average of 36 percent, the lawsuit says. The Department of Education proposed eliminating financial aid for students in postsecondary programs that fall below 45 percent repayment rates, effective next July.

"On this news, the price of Capella's stock plummeted an additional $9.26, or 13.19 percent per share," with a 438 percent increase in trading volume, the suit says.

The lawsuit, which names Capella, CEO J. Kevin Gilligan and CFO Lois Martin as defendants, seeks certification as a class-action case and seeks unspecified economic damages yet to be determined.

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